Question

Jorgansen Lighting, Inc., manufactures heavy-duty street lighting systems for municipalities. The company uses variable costing for internal management reports and absorption costing for external reports to shareholders, creditors, and the government. The company has provided the following data: Year 1 Year 2 Year 3 Inventories: Beginning (units) 200 170 180 Ending (units) 170 180 220 Variable costing net operating income $1,080,400 $1,032,400 $996,400 The company’s fixed manufacturing overhead per unit was constant at $560 for all three years. References Section BreakExercise 5-3 Reconciliation of Absorption and Variable Costing Net Operating Incomes [LO5-3] 2.value: 5.00 pointsRequired information Exercise 5-3 Part 1 Required: 1. Determine each year’s absorption costing net operating income. HintsReferenceseBook & Resources Hint #1 Check my work 3.value: 5.00 pointsRequired information Exercise 5-3 Part 2 2. In Year 4, the company’s variable costing net operating income was $984,400 and its absorption costing net operating income was $1,012,400. a. Did inventories increase or decrease during Year 4? Increase Decrease b. How much fixed manufacturing overhead cost was deferred in or released from inventory during Year 4?

Answer 1

1.

Particular	Year 1	Year 2	Year 3
Beginning inventory	200	170	180
Ending inventory	170	180	220
Change in inventory	(30)	10	40
Fixed manufacturing overhead (opening inventory)	$112,000	$95,200	$100,800
Fixed manufacturing overhead (closing inventory)	$95,200	$100,800	$123,200
Change in Fixed Manu. Overhead	(16,800)	$5,600	$22,400
Variable costing net operating income	$1,080,400	$1,032,400	$996,400
Change in Fixed Manu. Overhead	$(16,800)	$5,600	$22,400
Absorption net operating income	$1,063,600	$1,038,000	$1,018,800

2. Absorption costing net operating income is greater than variable costing net operating income in year 4. Inventory must increase during the year and fixed manufacturing overhead deferred in inventory. The deferred inventory amount is (1,012,400 - $984,400) = $28,000